“good partners”—meaning that they communicate candidly about
problems, have clear plans for allocating current and future cash flow,
and own sizable stakes in the company’s stock (preferably through
cash purchases rather than through grants of options). But “if man-
agements talk more about the stock price than about the business,”
warns Robert Torray of the Torray Fund, “we’re not interested.”
Christopher Davis of the Davis Funds favors firms that limit issuance
of stock options to roughly 3% of shares outstanding.
At Vanguard Primecap Fund, Howard Schow tracks “what the com-
pany said one year and what happened the next. We want to see not
only whether managements are honest with shareholders but also
whether they’re honest with themselves.” (If a company boss insists
that all is hunky-dory when business is sputtering, watch out!) Nowa-
days, you can listen in on a company’s regularly scheduled conference
calls even if you own only a few shares; to find out the schedule, call
the investor relations department at corporate headquarters or visit
the company’s website.
Robert Rodriguez of FPA Capital Fund turns to the back page of
the company’s annual report, where the heads of its operating divi-
sions are listed. If there’s a lot of turnover in those names in the first
one or two years of a new CEO’s regime, that’s probably a good sign;
he’s cleaning out the dead wood. But if high turnover continues, the
turnaround has probably devolved into turmoil.
KEEPING YOUR EYES ON THE ROAD
There are even more roads to Jerusalem than these. Some leading
portfolio managers, like David Dreman of Dreman Value Management
and Martin Whitman of the Third Avenue Funds, focus on companies
selling at very low multiples of assets, earnings, or cash flow. Others,
like Charles Royce of the Royce Funds and Joel Tillinghast of Fidelity
Low-Priced Stock Fund, hunt for undervalued small companies. And,
for an all-too-brief look at how today’s most revered investor, Warren
Buffett, selects companies, see the sidebar on p. 401.
One technique that can be helpful: See which leading professional
money managers own the same stocks you do. If one or two names
keep turning up, go to the websites of those fund companies and
download their most recent reports. By seeing which other stocks
these investors own, you can learn more about what qualities they
400 Commentary on Chapter 15